China’s New Franchising Laws: Want Fries With That?

On May 1, 2007, China’s Ministry of Commerce (MOFCOM) will be enacting new franchise regulations that will apply equally to foreign and domestic franchisors and that are expected to make foreign company franchising easier.

China’s franchise requirements are fairly basic. Franchisors must have been in business for at least one year and have owned at least two direct-operation stores. The current regulations require these two stores to have been in China so the silence on this in the new regulations probably means two stores anywhere will qualify. The new regulations are also vague as to whether the two direct operations stores have to have been operating for at least a year or merely the franchisor itself have been in business for that time.

The franchisor is required to provide accurate written information and other materials regarding the franchised operations at least 30 days before signing a Franchise contract. This information must include, among other things, the franchisor’s name, domicile, amount of registered capital, business scope, intellectual property rights, and involvement in lawsuits.

The franchise contract must be in writing and must be for a minimum of three years, unless the franchisee expressly agrees otherwise. The regulations have an unspecified cooling off period, during which time franchisees can terminate their franchise contracts.

The new regulations do not require franchisors to secure approval to franchise before doing so; they merely require franchisors register with the provincial government or MOFCOM (for those who will engage in franchising in multiple provinces) within 15 days after selling the first franchise. The government is then required to register the franchisor within 10 days of receiving the required documents from the franchisor. The franchisor’s required documents include copies of a certificate of incorporation or business license, a form franchise agreement, an operations manual, a market plan, and evidence the franchisor owned at least two directly operated stores (For at least a year? Anywhere?) and been in business for at least a year. Franchisors are not required to provide financial disclosure documents to the government, but they are required to provide them to prospective franchisees.

Under the new regulations, franchisors are no longer jointly and severally liable for products and services provided by their designated suppliers. For instance, if McDonald’s designated cup supplier provides the franchisees with defective cups, McDonalds itself will not be liable for that.

Though much will depend on how the new regulations are enforced, China does appear to be opening up on franchising and it is looking like doing business in China will soon be getting easier on the franchise front.

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.